USD/INR bulls wave the white flag around 74.50 zone

In the recent times, the conflicting narratives have been pulling the global markets in different directions. The dominant theme that has been driving both currency and equity markets is the expectation of a V-shape recovery. The USDINR bears reacted to the rebounding economic data, encouraging headlines around coronavirus vaccine, super-cheap liquidity, hopes of fiscal stimulus from the government and the central banks and optimism that the global economy will be back on its feet quickly. This, along with dollar inflows related Reliance Jio stake sell supported the sharp slump in USD/INR spot breaking its multi-month support around 75.20 levels and counter hit a low of 74.53.

However, the bulls argue that a full recovery will take a long time as the coronavirus cases are increasing at a rapid speed across the US and other parts of the world. The World Health Organisation, on Saturday said that more than 200,000 coronavirus cases were confirmed over a 24-hour period, which is a record figure.

For now the bears are winning the battle. Technically, we expect a rebound in USD/INR spot. The RSI is currently at 16.8 which indicates an oversold position. As seen in the chart, the USDINR spot respected 74.53 level, which is the crucial support of 100 MA. The annualised premium for 1-year forward has sharply shot up to 3.94% from 3.84% seen on Friday. Meanwhile, the USD/INR 1-month ATM Volatility has been increasing to 5.7% from 5.3% seen on Jun 26. Also, there has been an uptick in USDINR PCR (Put/Call ratio) to 0.87% as on Friday from 0.80% seen on Thursday.

So far in the month of July, FII's have been net sellers of equity segment while net buyers of debt. They have sold Rs 39.59 bln from local stocks while bought Rs 2.16 bln from local debt market.  

However, RBI has been defending the downside in USDINR spot at gradual intervals. Initially, the central bank was protecting the psychological level of 75, and now 74.50 zone. We expect it to continue the intervention and suck in all the dollar inflows in both equity and debt market.

The immediate support lies around 74.45-74.20-74.0, while, immediate resistance lies at 74.75 and crucial resistance is at 75.0 mark. Once it breaks and sustains above 75.0 then we can expect a rally towards 75.30-75.50.

Going ahead, the ongoing geopolitical tensions between US-China and India-China will keep markets sentiments on edges. The continuous hike in coronavirus virus cases especially US and India and ongoing geopolitical tensions will limit the fall in USDINR pair.